3 key considerations in recordkeeping for crypto estate planning

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As cryptocurrency becomes mainstream, it’s becoming more common to see digital assets included in our clients’ estate planning, sometimes in sums that are far from trivial. While many of the best practices for crypto estate planning are the same as those for general estate planning, there are several idiosyncrasies that require additional attention during the estate planning process.

Many of these concern the pseudonymous and decentralized nature of blockchain technology. Investors don’t need to provide their names or contact information when making crypto trades; typically, all you need is a wallet address. This means that if someone who holds crypto dies without leaving records of their assets, the wallets and their linked funds may never be discovered.

What’s more, even if the existence of a wallet is known, without the proper credentials, such as a password, private key, or seed phrase (more on that below), crypto assets are impossible to access. There are some real horror stories about people losing their seed phrase, and thus, losing access to a crypto fortune.

One of the most important elements of crypto estate planning is leaving a detailed record of crypto holdings: where and when they’re purchased, where they’re stored, and how to access them. Read on for three questions that are vital to ask clients who are preparing their crypto estate plans.

1. Where is your crypto wallet information recorded? 

Cryptocurrency and non-fungible tokens (NFTs) live on the blockchain at a certain address similar to a URL, but the addresses and credentials that prove a user’s ownership and allow access to digital assets are stored in a wallet. These credentials are called private keys, and are long, random digital codes. The longer and more random they are, the more secure they are; most are 256 digits long.  

Crypto wallets come in two categories:

  1. Hot wallets (online wallets): Hot wallets are connected to the internet. This makes them easy to use for transactions, but also leaves them vulnerable to exploit. Examples of hot wallets include MetaMask, Coinbase Wallet, and Edge Wallet. 
  2. Cold wallets (offline wallets): Cold wallets are not connected to the internet. They can be as simple as a paper wallet, which is just a written record of private keys. However, a more secure cold wallet is a hardware wallet, which stores private keys digitally, but offline, much like a USB. Popular hardware wallets include Trezor and Ledger. 

In case someone loses access to their digital wallet, they also create a seed phrase, typically a series of 12, 18, or 24 random words that allow you to recover your wallet, even if you lose the physical device the information is stored on.

In order for succession to proceed smoothly after a client’s death, the successor or executor must be able to access all of the decedent’s crypto wallets. Part of the estate planning process should be recording the location, passwords, and seed phrases of digital wallets, and storing those records in a secure place. 

For example, your client may want to keep these records in a fireproof safe or bank safe deposit box. Some people have gone to even greater lengths to ensure this information isn’t destroyed. For example, I’ve worked with someone who had their seed phrases engraved on metal plates. Other security measures to consider include Shamir’s Secret Sharing or multisig wallets similar to those offered by Casa or Unchained Capital.  

It’s important for clients to regularly update these records to make sure that any new addresses or wallets are included in their will or trust. Make sure your client includes the following information:

  • Wallet address
  • Type of wallet 
  • Security keys
  • Seed phrases

2. How can your beneficiaries access your trade information for tax purposes? 

Wallets don’t necessarily include all of the information necessary for tax reporting purposes, which can make crypto tax reporting very difficult for an estate’s successor or beneficiaries. Pertinent information, such as cost basis and transaction fees, can get lost when assets are transferred between wallets, especially from hot to cold storage.

For this reason, in addition to records about wallet credentials, the grantor should also leave instructions on how to access trading and tax planning information. This includes:

  • Name and contact information of the tax advisors.
  • Username and password for any crypto tax software accounts.
  • Information about the exchanges used for trading, including username and password.
  • A summary of all traditional and digital assets, including how each is titled, regardless of whether it is held individually or in an entity or trust.

If you’re helping an heir, executor, or successor trustee with crypto tax reporting, you may find that the grantor’s tax advisors and/or tax software are your greatest resources. Many exchanges, particularly DeFi (decentralized finance) exchanges, do not provide exportable trade information. However, if the grantor had reported crypto on their taxes, the relevant tax information may already be recorded by their crypto tax accountant and/or software.

3. Is your executor or successor trustee comfortable with crypto? 

Serving as the executor or successor trustee of any estate is a difficult task, but the difficulty is compounded when crypto assets are involved. Confirm with your client that their choice for the executor/successor trustee has experience with blockchain. If not, or if the trust is particularly large and/or complicated, your client may want to leave instructions and set aside funds for hiring advisors who can help, such as crypto accountants or attorneys.

A portion of this content originally appeared in “Intro to Crypto Estate Planning” on the TokenTax blog.

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